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Define Conventional Mortgage
The term “conventional home loan mortgages” refers to a home loan that provides a maximum of 80 percent of the purchase price or appraised value of a property. In order to qualify for one of these, you have to make a down payment of a minimum of 20 percent of the purchase price. Mortgages providing more than 80 percent of the property’s fair market value are called high ratio mortgages. The ratio refers to the percentage of borrowed money in comparison to the property’s total value. (Conventional mortgage definition)
Conventional Mortgage Loan Requirements
Here’s how it works. Let’s say you are buying a home for an agreed price of $300,000. This means that you need to make a minimum down payment of $60,000 in order to qualify for conventional mortgage financing. If you are looking to borrow more than $240,000 to make the purchase, you have to get a high ratio loan. These are possible to obtain with a minimum of 5 percent down. The down payment can come from cash or the proceeds from selling other property that you own. In most cases, down payments for conventional mortgages cannot come from borrowing.
Conventional Mortgages in Canada
Conventional mortgages have several benefits. Because you’re making a significant down payment on your purchase, you immediately get a higher level of equity in that property. This financial room means that the bank is not risking as much as it is when people purchase homes with high ratio mortgages. With some lenders, making this sort of mortgage gives the borrower access to home equity lines of credit. Also, conventional mortgages generally do not mandate mortgage insurance. High ratio loans have to be insured by a lender approved company. This is usually the Canada Mortgage and Housing Corporation (CMHC), although such companies as Canada Guaranty and Genworth Financial also handle a great deal of these policies. If the loan ends up going to default, the insurance policy ends up protecting the bank.
This mortgage insurance is not free, of course, and the insurer will charge you a fee for carrying the policy. The specific amount of the fee depends on the principal of the loan and the amount that you are making as a down payment. Generally, fees are between 1 and 3.5 percent of the principal. You can pay this up front or roll it into your principal. Even though the buyer pays the premium, the policy benefits the lender. If you go into default as the borrower, the policy proceeds go to the bank, not to you.
Conventional mortgages are more difficult to obtain in Canada than they were before the collapse of the housing market in 2008 and 2009. Because banks were issuing loans without doing a lot of due diligence, borrowers were able to get access to far more credit than they had the capacity to pay. Because so many of these loans went into default, the banks that wrote the loans found themselves in serious financial trouble. As a result, the Canadian government put a number of safeguards into place in order to keep this sort of epidemic from erupting again. This means that there are some people who have the 20 percent down payment in place (or even as much as 30 or 40) but who have a hard time qualifying for a conventional mortgage in Canada. Traditional lenders tend to require a minimum credit score as well as verification of income, and for people who are self employed or who have recently changed jobs, that requirement can cause difficulties. Also, people who have had credit issues in the past may not have the necessary credit score in order to secure a conventional mortgage.
If you have the down payment, credit score and verifiable income that traditional lenders require in order to receive a conventional mortgage, then that is one of the best ways to finance a home purchase. If you are looking for the right lender for your needs, Amansad Financial has connections with conventional lenders that can give you the best interest rates and the lowest closing costs. If you don’t quite meet the requirements that banks have for a conventional mortgage, then Amansad Financial also has connections to a network of private lenders and also has structured creative solutions using seller financing and other strategies to get our clients the financing they need. Contact one of our mortgage professionals today to get the process started on your Conventional Home Loan!